What A Successful SaaS Strategy and Pricing Business Looks Like Today

SaaS Strategy: Where are we now?

Back in 2012, I wrote an article (on this blog) about the potential future of business in the internet age, called The Internet Tsunami. Back in 2012 as we emerged from the infancy of the internet I stated that the internet would become a major business channel for all business sectors not just music and insurance. It was no longer a passing fad.  Back in late 1990’s we saw the internet emerge from having been a research tool to something which people could experience through to the dot.com boom of the early 2000’s when money flooded in to this emerging market but the infrastructure and customer engagement platforms were not ready preventing online becoming more than a side show for businesses.

After the financial crisis of 2007/8 as the economic bounce-back accelerated change in the economy opening the door to the internet age and it began to take shape. My article in March 2012 suggested that what we were seeing the beginnings of the permanent change across all sectors and markets, it was not just Amazon replacing CD music shopping, but that the world was going to change. 

The SaaS Tipping Point 

Now that the technology tipping point has occurred and it has become the dominant global force in driving consumer behaviour. This paradigm shift is when markets move in response to macro factor drivers. For companies going too early with any trend can lead them to commit in concrete to a technology which leaves them left behind as the internet evolves for example Friends Reunited: provided no interaction and on-going relationship creation, as Facebook found is what makes a successful online social media platform.

Go too late, and you miss the market shift and find you have been left behind with disastrous consequences. Comet sold electrical white goods and collapsed with over 20% of the UK market share through its 200 stores, but refused to see the move online for these goods by younger consumers, while Amazon at the time had already achieved 8% of the white goods market with no physical shops. 

If you can see a trend you have already missed it.  Once the tipping point in a sector then you are playing catch-up. So over the last 9 years the internet has not just become another channel to market for many goods, it has become the dominant channel for many sectors most noticeably in retail, but is now almost ubiquitous, impacting upon every market. 

The ability to take products and services online is now in full force with organisations inventing themselves, reinventing themselves as online (SaaS) business models. For many this is a result of a number of key factors, not least is about keeping up with your customers and the competition. But, other key factors such as the reduction in cost of developing online services, as well as the ability to upgrade services quickly in response to rapidly changing or evolving customer demands are other positive drivers of moving online.

Making the shift to go to a SaaS solution is a strategic one, it should be based upon a clear strategic assessment of the market and customer needs and carefully planned out in a detailed business plan.   

Software As A Service SaaS 

Software as a Service (SaaS) solutions are now common across all sectors replacing manually made service offerings. For many businesses replacing, upgrading and being able to compete within their sector requires companies to move to SaaS offerings. Either bespoke designed SaaS from scratch using in-house or outsourced technicians or tailored from white label sector providers. Offering a SaaS solution to a market is not just a shift change in what an organisation offers but a whole new way of thinking.

SaaS though is more than just simple a move online.  It requires a different way of thinking from traditional models. The changing nature of customer engagement, moves from the physical meeting to the online engagement, that requires companies to think and act differently. The nature of the service also changes as it becomes totally arms length customer centric. Customers choose when and what they want to use of the service (for example over 2,700 UK people did their tax returns on Christmas day in 2019, with over 30,000 doing them over the Christmas holiday period in 2019), this requires companies to resource supporting users when they need it not when you are open. 

Business to consumer SaaS models need to support consumers with planned engagement and support channels as well as developing SaaS loyalty strategies in place to retain and develop customer segments. For B2B SaaS models working across partner channels puts a set of different requirements in place in accessing target audiences through integrated service offerings through integrated software .

SaaS behaviours also require business to measure very different metrics to be successful,  many of which are new to companies not used to SaaS solutions, but if you do not measure them SaaS will fail to deliver the results you expect.  Here are some of the key areas for SaaS businesses to monitor and drive decision making from.

SaaS Solutions Being a Disrupter

Disrupting any market requires your SaaS offering to target and penetrate precise target segments and disrupt the existing market.  Focus on measuring the disruption your new offering is causing. Are you reaching your core target audience with your new offering and taking customers from the competition, or protecting your vulnerable customers with you new offering. Disruption is about changing people’s perception and behaviour patterns. So it is important to measure the existing behaviours and their new behaviours using the SaaS solution. 

Just shifting your existing customers online maybe a strong defensive strategy if your are the last to move into SaaS, but that is not a disrupter. To disrupt a market you have to do something which changes the game. Changes the structure, the dynamics and the value proposition within the target audience. 

SaaS solutions MUST do MORE than just Match Your Offline Offering

SaaS solution need to offer more to customers within their sector. Providing a genuine value-added solution must be designed and built into the SaaS solution. Either at the start or as a planned upgrading rollout plan. If your Minimum Product Viability (MPV) assessment provides compelling evidence of the potential to move online, just migrating offline to online business activities will not succeed. SaaS businesses must find, connect and engage with customers in a completely different way than their offline equivalents, even if they are the same customer base being migrated across by the company. That customer experience must reflect the culture and value which the audiences has and wants to experience for it to be successful. SO SaaS businesses must actively drive engagement, create direct and indirect communities, offer advice and support and actively monitor audience segments value experiences to enable SaaS to add real value to target segments. 

Building more into a SaaS solution can be undertaken at low (or no cost) if planned in at the design stage. `Good forward thinking strategically thought out SaaS solutions can design in actual and anticipated customer needs at low or no cost. Building into the SaaS platform forward evolution so that they can evolve in response to customer evolving and emerging demand, overcome competition short-term and long-term responses and to life-time evolution needs.

Being able to add in and evolve a SaaS solution to a complete solution is essential so it offers a complete long-term solution, not just a quick fix. That requires several micro launches, (evolutions) to meet theses needs and to enable the SaaS solution to add more value (value proposition). 

Measuring why, where and who is using the site for what as well as forums and associated features will tell you the full value you could, should and must offer. Often support functions such as help desks, brochures, technical information, upgrading options and associated activities are always areas where doing more can be seen, but only if you measure them! What about training and certification of users and channel partners, and the whole range of other activities which these intranet offerings can also provide?

SaaS Success: Target the Right Segments.       

Moving to SaaS is not a straight line. Build it and then just sit back and watch customers come onboard, is how SaaS is sold to CEO’s in shifting their business to a SaaS solution. But that is not how SaaS adoption works. Adoption curves matter. So identifying who, why and when segments will move over to a SaaS offering is vital for success. Being able to anticipate and plan around customer acquisition by customer target segment must be planned out and executed in dissectible phases.

One major challenge is that the key drivers of a SaaS solution within an organisation may well come from specific user segment(s) within an organisation. Identifying the pain points within a target audience is therefore vital. Who will adopt your technology when is an important element in designing your market entry strategy.

Saas Adoption Curve Modelling

Who are the core target segments that SaaS solution should be targeted at?  This central question is often lost in the generic answer everyone! But it is not. SaaS solutions must add value to everyone, but they must be focused on converting target businesses strategic target audience. That focus must be at the heart of the SaaS solution design and implementation, if you win more great but your focus is to move the brand’s customer base. 

For success SaaS solution moves the brand’s position, its profitability and its performance by acquiring new higher value customers. Higher value customers in both B2B and B2C environments for mainstream players are usually found higher up the adoption stream. So laggards find growth in volume and value in the late majority (see below for market adoption curve and total market size modelling). Late majority players can already win downstream laggards but need to expand by either growing with their sector or by moving into early majority customer segments, and likewise early majority customers look at high value (but smaller total volume) early adopters. 

Adoption Curve and Total Market Segmentation

The key measurements here are to identify the precise target segments you intend to win, and measure that  as your metrics of success. Do not just measure total customers as this can inflate your SaaS success. While measuring total numbers always looks good. It may not be profitable growth and can often lead to SaaS platforms being pulled into chasing total numbers not focusing on developing profitable long-term customers. This is typically seen when a new SaaS platform has to buy its customer growth, so people see the growth as success, but it can be burning through their cash reserves as they have focused on the wrong metrics. 

Profitable target customers support growth of a SaaS solution. This must be measured to see if the strategic goal is being achieved. 

SaaS Strategic Pricing Models

For a SaaS business to succeed it needs to get its pricing right, there is no bigger strategic decision to take. There are several ways to price your SaaS solution which we can break down into 6 key models and a couple of common variants. Choosing your pricing model will reflect the market you are in, your strategic business objective, the nature of the solution you’re providing and the designed rollout of your SaaS value proposition solution you are offering.

1. Flat Rate Pricing

The most common and simple, often replacing a previous non-SaaS solution. It is simple and effective, easy to use price to incentives by allowing target audiences to compare the value proposition. The difficulty in this model is that it is difficult to add value to target audiences, such as high-use or high-value customers.

Some SaaS pricing models then try to add premium models to this, by adding a second solution to enable extra features and pricing to the offering, but this often creates technical challenges and is difficult to migrate customers across to. 

2. Usage Based Pricing 

Usage based pricing is popular and provides an ideal way to price your SaaS solution. It enables pricing scaling, the more your company use, the more you value you consume, the more you pay. It allows low cost acquisition and then scale-up in pricing towards target audiences. Ideal for B2B solutions, usage based pricing works well as disrupter within a business service sector.

This also enables additional levels to be added and funded through growth as usage drives demand.  Usage based pricing also reduces and often removes barrier to entry as the SaaS platform accounts for a wide-range of customer segments, from new entrants through to high demand heavy user groups. 

Usage based pricing does have some limitations. The moving up levels (and down) can be challenging for customers to see what they get for the price they pay. The key area of concern for a SaaS Solution using this model is that monthly revenue, a key metric will vary and is therefore not popular within the sector as predictable revenue is often a core demand for investors.   

3. Multiple Tiered Pricing Models

One of the most effective models as it allows the SaaS platform to be priced to target audiences using tiered pricing. Tailoring different packages around target audiences enables the SaaS platform you can appeal to multiple audiences. This has a key secondary advantage in revenue generation as you maximise revenue across all channels to market. It also allows simple clear and honest upselling opportunities as well as add-on pricing with new features/levels being added in response to changing demands. 

Key factors to be be aware of here is having too many pricing levels. Just because you can does not mean you should. 3 is optimum and 5 is often seen as maximum, the more you add the higher the abandonment rates and the lower the effective of marketing campaigns. 

The idea of dynamic pricing, too many tiers leads towards a platform that looks like usage pricing which dilutes and degrades the tiered pricing focus on key target segments, vital for strategic success of a SaaS solution. The other downsides of too many packages is that trying to over target segments damages the focus on the tiered model, confusing customers through too many choices and damaging price effectiveness by not reflecting tiered pricing to deal with heavy use customer groups.   

4a. User Pricing

The fourth pricing model moves away form company wide pricing to the end user. This model is ideal for many sectors where simple pricing wins customers over. Wether that is a fixed annual or monthly fee, its simplicity and logic engages with SaaS platforms whose offering of a direct pricing model allows customers to sign-up as individuals. 

User pricing is popular as it is predictable in income and scales easily with numbers. This predictability makes it popular but needs to be internally measured by usage by individuals to see what value they generate from the platform. 

While simplicity makes it popular it is also its major limitation as a pricing model. Per user charges means that there is little opportunity to get group buy-in as one person can use the platform and share the results. The inability to signup whole teams as one limits routes to market through channel partners. It also means that churn becomes a major factor as it is harder to control churn as people relate use to value as an individual.    

4b. Active User Pricing

Is a variant of of user pricing but works by charging for people actually using the SaaS platform. It is seen as excellent value for money as it removes risk for purchasers as sign-up does not cost. This drives engagement and adoption as it is only usage which is charged.  People can sign-up but do not pay until they actually use the platform, it is ideal for enterprise business models. 

The downside of active user pricing is that it is difficult to grow outside specialist enterprise areas. Often premium priced as a live service it is difficult to encourage widespread adoption with teams or across sectors. For example accounting software is great in the finance department but off limited value elsewhere in a business.

5. Per Feature Pricing

A more recently developed and currently popular variation on the user based pricing model theme is called per feature pricing. Customers of businesses pay a subscription fee, a base fee with limited functionality which achieves MPV and adds real value and then differing premium priced add-on features which either replace the need for multiple upgrade options or allow a SaaS solution to adapt with its own specialist feature cost model expansion. 

This model encourages customers to upgrade to unlock additional functionality which allows segment specialisation and directly relates those functions to direct costs. Think about gaming models where users buy the core game but then trade up by buying additional features. This per feature pricing model allows sites to know their operating cost models and revenues of the base model, and enables cost scaling for bespoke areas that may take significant resources to develop. Sub-segmentation by feature is popular as it allows cost to value to be direct and then reverse rolled back into the SaaS site as it evolves as a cost-free upgrade.   

The key challenges of cost per feature pricing is that SaaS solutions can be pulled by small segments away from their core model to meet these minority groups. The other challenge of per feature pricing is that of customer frustration as key features are at a premium.  

6. Freemium Pricing

Saving one of the most popular and misunderstood to last is the freemium model. This model allows customers limited functionality the SaaS solution platform for free. This enables mass adoption through any market of the SaaS platform with a clear level of functionality which buys users in. It is ideal for large volume platforms such as social media channels as the model removes the key hurdle to volume customer acquisition. 

Freemium  gets customers bought in for nothing as there are no barriers to entry and this supports rapid expansion through and across channels, but it does limit value adding at the freemium level. Encouraging customers to trade up and use the additional chargeable features is teh real challenge  

Predicated revenue planning is the real looser here for companies. This makes it less popular with funding parties (and accounts departments) as conversion to revenue is undefined within this model.  To fund freemium SaaS models multiple funding systems are often adopted, such as smart algorithm advertising which is an ideal way to fund expansion.    

With freemium sites high churn rates and low loyalty rates are major drain factors to this model, both of which make traction and the ability to encourage customers to upgrade difficult. Funding to support the core functionality is often under pressure to keep it developing and engaging with the volume of its core customer base. 

Summary: Successful SaaS Strategy Business Today

SaaS solutions are now mainstream to nearly all business and customer segments. Being mainstream though does not mean that the risks have disappeared, in many ways they have increased as expectations have accelerated as audiences demands have risen.  

Whichever SaaS pricing model you adopt understand that they all come with risks which need to be understood and actively managed within your planning.  

SaaS solutions must be part of a strategic process for leaders to understand and deal with. One area that many leaders do not fully appreciate is that building an experienced SaaS team around them is a prerequisite for success.    

Learn more read further blogs or get in touch to see how I can assist you.

Learn more at www.richardgourlay.com

By Richard Gourlay

Richard Gourlay, experienced management consultant, leadership development and strategic advisor to high growth companies. Author of book:- Strategy: The Leader's Role by Richard Gourlay builds the skills which makes leaders successful in their business. #dumfries #galloway #scotland, #mentor, #castledouglas, #leadershipskills.

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